Basic Consolidation Question 77

QUESTION 77: BASIC CONSOLIDATION

On 1 April 2009 Picant acquired 75% of Sander’s equity shares in a share exchange of three
shares in Picant for everytwo shares in Sander. The market prices of Picant’s and Sander’s shares
at the date of acquisition were $3·20 and$4·50 respectively.

In addition to this Picant agreed to pay a further amount on 1 April 2010 that was contingent upon
the post-acquisitionperformance of Sander. At the date of acquisition Picant assessed the fair
value of this contingent consideration at$4·2 million, but by 31 March 2010 it was clear that the
actual amount to be paid would be only $2·7 million(ignore discounting). Picant has recorded the
share exchange and provided for the initial estimate of $4·2 million forthe contingent
consideration.

On 1 October 2009 Picant also acquired 40% of the equity shares of Adler paying $4 in cash per
acquired share andissuing at par one $100 7% loan note for every 50 shares acquired in Adler.
This consideration has also been recordedby Picant.Picant has no other investments.

The summarised statements of financial position of the three companies at 31 March 2010 are:
Picant Sander Adler
Assets $’000 $’000 $’000
Non-current assets
Property, plant and equipment 37,500 24,500 21,000
Investments 45,000 ni nil
82,500 24,500 21,000
Current assets
Inventory 10,000 9,000 5,000
Trade receivables 6,500 1,500 3,000
Total assets 99,000 35,000 29,000
Equity and liabilities
Equity
Equity shares of $1 each 25,000 8,000 5,000
Share premium 19,800 nil nil
Retained earnings – at 1 April 2009 16,200 16,500 15,000
– for the year ended 31 March 2010 11,000 1,000 6,000
72,000 25,500 26,000
Non-current liabilities
7% loan notes 14,500 2,000 nil
Current liabilities
Contingent consideration 4,200 nil nil
Other current liabilities 8,300 7,500 3,000
Total equity and liabilities 99,000 35,000 29,000

The following information is relevant:

(i) At the date of acquisition the fair values of Sander’s property, plant and equipment was
equal to its carrying amount with the exception of Sander’s factory which had a fair value of
$2 million above its carrying amount. Sander has not adjusted the carrying amount of the
factory as a result of the fair value exercise. This requires additional annual depreciation of
$100,000 in the consolidated financial statements in the post-acquisition period.

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Basic Consolidation Question 77

Also at the date of acquisition, Sander had an intangible asset of $500,000 for software in
its statement of financial position. Picant’s directors believed the software to have no
recoverable value at the date of acquisitionand Sander wrote it off shortly after its
acquisition.

(ii) At 31 March 2010 Picant’s current account with Sander was $3·4 million (debit). This did
not agree with the equivalent balance in Sander’s books due to some goods-in-transit
invoiced at $1·8 million that were sent by Picant on 28 March 2010, but had not been
received by Sander until after the year end. Picant sold all these goods at cost plus 50%.

(iii) Picant’s policy is to value the non-controlling interest at fair value at the date of acquisition.
For this purpose Sander’s share price at that date can be deemed to be representative of
the fair value of the shares held by the non-controlling interest.

(iv) Impairment tests were carried out on 31 March 2010 which concluded that the value of the
investment in Adler was not impaired but, due to poor trading performance, consolidated
goodwill was impaired by $3·8 million.

(v) Assume all profits accrue evenly through the year.

Required:
Prepare the consolidated statement of financial position for Picant as at 31 March 2010.
(15 marks)

ACCA F7 – June 2010 – Q1a

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Basic Consolidation Question 77

ANSWER TO QUESTION 77: BASIC CONSOLIDATION

Picant Group Consolidated SFP as at 31 March 2010

Assets $000 $000
PPE $37,500+24,500+2,000 J2– 100 J3 63,900
Goodwill W3 12,200
Investment in associate $12,000 J1+ 1,200 J8 13,200
Other investments $45,000 – 45,000 J1 0 89,300

Current assets
Inventory $10,000+9,000 +1,800 J5 – 600 J5A 20,200
Trade receivables $6,500+1,500 -3,400 J5 4,600 24,800
Total assets 114,100

Equity
Equity shares 25,000
Share premium 19,800
Retained earnings W6 27,500
72,300
Non Controlling Interest W5 8,400 80,700

Non - current liabilities

7% loan notes $14,500+2,000 16,500

Current Liabilities
Contingent consideration $4,200 -1,500 J7 2,700
Other current liabilities $8,300+7,500-1,600 J5 14,200 16,900

Total equity and liabilities 114,100

W1 GROUP STRUCTURE
Sander Subsidiary Acquisition date:1 Apr 2009 Group = 75% NCI 25%
Adler Associate Acquisition date:1 Oct 2009 Group = 40%
$000

W2 NET ASSETS (of subsidiary) AT ACQUISITION S

Equity share capital 8,000
Retained earnings (pre) 16,500
J2 2,000
J4 (500)
26,000

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Basic Consolidation Question 77

W3 GOODWILL S
InvestmentJ1 33,000
Less: 26,000 W2 x 75%W1 (19,500)
13,500
Fair value of NCI (8,000 x 25% x $4.5) 9,000
Less: 11,000 W2 x 40%W1 (6,500)
2,500
16,000
J6 (3,800)
12,200

W4 POST ACQUISITION RESERVES (of subsidiary) RE

Balance 1,000
J3 (100)
J4 500
J6 (3,800)
(2,400)

W5 NON CONTROLLING INTEREST S

26,000 W2 x 25%W1 6,500
NCI goodwill W3 2,500
(2,400) W4 x 25% W1 (600)
8,400

W6 GROUP RESERVES RE
Parent reserves 27,200
J5A (600)
J7 1,500
J8 1,200
29,300
(2,400)W4 x 75% W1 (1,800)
27,500

$ 000
JOURNAL ENTRIES WITH WORKINGS
Dr. Cr.

Investment in subsidiary 33,000

(-) 1 Investment in associates 12,000
Other investments 45,000
Subsidiary (8,000 x 75% x 3/2 x $3.2 Share exchange) + 4,200 contingent = $33,000
Associate (5,000 x 40% x $4 cash) + (5,000 x 40% x $100/50 loan notes) = $12,000

PPE 2,000
(i) 2
Reserves Pre (Sander) 2,000
Fair value adjustment

RE (Sander) 100
(i) 3
PPE 100
Extra depreciation on fair value adjustment

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Basic Consolidation Question 77

Reserves Pre (Sander) 500

(i) 4
RE (Sander) 500
Software - adjustment for the reversal of loss recognized in post acquisition period which should
have been recognized in pre acquisition period.

Other current liabilities 1,600

(ii) 5 Inventory 1,800
Trade receivables 3,400
$3,400-1,800 = $1,600 payables to be cancelled

RE (Picant) unrealized profit 600

(ii) 5A
Inventory 600
$1,800 x 50/150 = $600 unrealized profit

RE (Sander) 3,800
(iv) 6
Goodwill 3,800
Impairment of goodwill

Contingent consideration 1,500

(-) 7
RE (Picant) 1,500
Decrease in fair value $4,200 - $2,700 = $1,500

Investment in associate 1,200

(-) 8
Share of profit from associate / RE (Picant) 1,200
$6,000 x 6/12 x 40% = $1,200

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